The lack of effective functioning in local bodies partly results from their incapability to generate independent financial resources. Discuss.

The 73rd and 74th Amendment constitutionalized local self governments, and recognized the principle of subsidiarity i.e. the smallest decision-making body is most competent. However, there are numerous challenges. (1) Inability to generate financial resources: a) Lack of financial autonomy => depend on flow of funds. b) Lack of diversified revenue basket => over-dependence on property tax. c) Lack of innovative financial mechanism => No developed municipal bond market. d) Inactive state Finance Commissions - only 2 states have constituted the SFC.

e Lack of participative budgets - at present, only 1% of GDP (South Africa-6%, Brazil-7.5%). Revised planning Recommendations: (1) As per 15th Finance Commission, devolution of grants to local bodies should be based on: i Performance metrics ii Constitution of state finance commission (2) As per RBI report, centre & states should share 1/4th of UST revenue with ISA. iii Innovative financial mechanisms => municipal bond market. iii Independent revenue generation => common resources like agro forestry, social welfare, dairy development etc. Thus, it is important to effectively devolve funds, functions & functionaries to LSG to serve their mandate.